The World Economy in the News Review

The World Economy in the News Review

The world economy tumbled into 2009 as what came to be called the Great Recession intensified. Vigorous fiscal, monetary and public credit policy easing nearly everywhere put a floor under the various national and regional economies, and a global economic recovery set in by mid-year. 2010 looks likely to be a year of continued recovery. It is expect real GDP on a global basis to increase 4.3% in 2010 and to continue at about that pace in 2011. For reference, it could be note that consensus expectations for next year center on 3.8% growth, with no comparable figures available yet for 2011.

Some patterns from the past look likely to endure. Chief among these is the relative out performance of the emerging markets economies. China, Korea, India, and Brazil are some of the stand-out examples. Other patterns look likely to have been secularly altered by the Great Recession. One of these is the orderliness of economic life of the previous quarter century, known as the Great Moderation.

The volatility of economic magnitudes was low, and now it looks likely to be higher. Another departure from past patterns (causally related to the last point) is the path of consumer spending, especially in the US. Consumption looks likely to grow at only about half the average pace of the previous quarter century, accommodating the widespread expectation of an up-drift in personal savings. Passing the baton of consumption-led growth to hundreds of millions in China, India, Brazil, and elsewhere is a long journey, with many twists and turns to be expected along the way.

Corporate profits in many economies are likely to be stronger than mediocre recoveries would ordinarily imply, but this comes at the cost of poor labor market conditions, especially in developed countries. Significant slack in labor markets, in turn, can be expected to keep core inflation low (or even lower) through 2010, at least. 2009 was a year of exceptionally low short-term interest rates, especially in the developed economies. One effect of this environment was to encourage capital outflow, especially from the US, in favor of emerging markets and their correlates such as commodities.

This flow is potentially destabilizing to the financial systems of the emerging markets, in part inducing them to keep their monetary policies looser than otherwise. Their efforts to deflect the inflows with taxes and other ...